3 Numbers: Eurozone Deflation Risk Receding, But Only Slightly
James Picerno | Dec 02, 2015 02:52AM ET
Today’s flash estimate for Eurozone inflation will be closely read ahead of tomorrow’s policy announcement from the European Central Bank. Later, the ADP Employment Report will provide fresh perspective for deciding if the US macro trend still points to a rate hike at this month’s Federal Open Market Committee meeting.
Meanwhile, keep your eyes on the effective federal funds rate, which has been flat to slightly lower in recent weeks. Is that a sign that the Federal Reserve will delay a rate hike into 2016?
Eurozone: Consumer Price Index (1000 GMT): European Central Bank President Mario Draghi is widely expected to announce an expansion of monetary stimulus at tomorrow’s policy meeting. But first we’ll see today’s flash estimate of consumer inflation for November across the countries that share the euro.
Economists think we’ll see slightly firmer pricing for last month. Econoday.com’s consensus forecast calls for a 0.3% year-over-year rise in the consumer price index. If the prediction holds, inflation will tick up to its highest rate since May. That’s still too close to zero for comfort, but for the moment it appears that deflation risk is receding, if only slightly.
A modestly firmer pace of CPI may raise questions about the need for rolling out additional policy stimulus. But Now-casting.com’s latest estimate for Eurozone GDP in the fourth quarter suggests that the macro trend may be stumbling again. Indeed, last week’s fourth-quarter, quarter-over-quarter projection dipped to 0.20% — the lowest forecast to date for this year’s final quarter. As such, the macro trend in Q4 is on track to decelerate to the slowest quarterly rate since second-quarter 2014.
The good news is that projections from other sources paint a somewhat brighter outlook. The November Euro-coin Indicator, for instance, estimates GDP growth for the euro area at 0.37%, which is in line with the growth rate for the previous two months.
Analysing the fourth quarter at this stage is still largely a guessing game. Nonetheless, there's enough downside risk lurking to convince Draghi and company to err on the side of caution and so it's likely that more stimulus will be unveiled in tomorrow’s ECB announcement.
US: ADP Employment Report (1315 GMT): The Federal Reserve may raise interest rates later this month, but the case for doing so weakened a bit in yesterday’s November update of the ISM Manufacturing Index. This widely followed benchmark fell more than expected, slipping below the neutral 50.0 mark for the first time in three years.
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Should the central bank be tightening monetary policy at a time when US manufacturing may be slipping into recession? To be fair, Markit’s PMI for the sector offers better news. Although the revised PMI for November is at a two-year low, the latest reading at 52.8 continues to reflect moderate growth.
“While the pace of manufacturing growth appears to have slowed in November,” said Markit’s chief economist, “it remains encouragingly resilient, which is all the more impressive once headwinds such as the strength of the dollar and malaise in overseas markets are taken into account.”
Nonetheless, the market will be eager to read today’s ADP report on private-sector payrolls for November. The release will bring more context for deciding if the central bank will start squeezing monetary policy. Econoday.com’s consensus forecast sees the ADP benchmark's increase in November as essentially matching the previous month's rise of 183,000. That’s a decent if unspectacular gain that's in line with the monthly increases we've seen in recent history for this data set.
By contrast, the government’s estimate of private nonfarm payrolls surged in October. Indeed, the Labor Department advised that US companies added 268,000 positions in the kickoff to the fourth quarter. That's the biggest monthly gain so far this year -- an increase that convinced many analysts to predict that higher rates at this month’s policy meeting are all but assured.
But if today’s ADP report continues to print in the low-180,000 range, the news will inspire chatter that the October surge in the government’s numbers may be an anomaly. In other words, today’s ADP data deserves close attention for deciding what to expect in Friday’s official jobs report – and for the Fed’s policy decision on interest rates, due on December 16.
US: Effective Fed Funds Rate: Speaking of monetary policy, the 2-Year Treasury yield—considered the most sensitive spot on the yield curve for rate expectations — has pulled back a bit from its recent highs. Is that a sign that the crowd is rethinking the argument that a rate hike is a near certainty for later this month?
Meanwhile, it's interesting to note that the effective federal funds rate remains at the lower range we’ve seen in recent months (based on data as of November 27). That’s a bit strange, considering that the crowd is otherwise pricing in high odds that the Fed will pull the trigger on December 16. Based on federal funds futures (as of December 1), the market is estimating a 79% probability that the policy rate will rise above the current zero-to-0.25% target at this month's FOMC meeting, based on CME data.
The US dollar’s recent strength, however, is giving some analysts pause. “There’s been comments made [by Fed officials] in the statements and over the last couple of meetings that they’re worried about dollar strength,” the chief currency strategist at Bank of New York Mellon in London told Bloomberg Television last week. “The Fed, relatively speaking, is going to be slow on policy in 2016.”
That still leaves room for a small rate hike this month ... or does it? The two-year yield’s recent rise to five-year highs certainly make a case for seeing a round of policy tightening. But as long as the effective federal funds rate is flat if not drifting lower there’ll be reason to wonder if expectations have once again run ahead of reality.
Disclosure: Originally published at Saxo Bank TradingFloor.com
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